Generation 40s – 四十世代

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Smoke and mirrors: Just how big is China’s economy really?

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South China Morning Post
Comment›Insight & Opinion

Stein Ringen

Stein Ringen says its phenomenal GDP numbers over the years have not been adjusted for bad debt and inefficient investment, and thus fail to reflect the true state of affairs

One consequence of the dramatic Chinese stock market crash is this: it has hit home that the economy is not all it is made up to be. There has been economic growth, of course, but there have also been smoke and mirrors.

Only a few months ago, the Financial Times, otherwise not an uncritical source, described China as the world’s biggest economy. Today, no serious observer would entertain that kind of fantasy.

There are two main reasons why the size and strength of the economy have been overestimated. First, the official statistics have been wrong.

From about 2010, even official growth rates have been edging downwards, from about 10 to about 7 per cent. But independent analysts, such as The Conference Board, Capital Economics and Lombard Street Research, have found that growth has long been officially overstated and/or that the decline has been steeper than officially stated, down now to about 4 per cent or less in annual growth.

Second, there are weaknesses in the economy itself that have not been recorded statistically. The government has stimulated economic activity by pouring in cheap credit and directing its enterprises to turn that credit into a stream of investments, some sound and some bad. The gross domestic product numbers record all of the economic activity but do not adjust realistically for the burden of bad debt and investments.

Estimates by researchers at China’s National Development and Reform Commission, an official agency, suggest that near to half of the total investment in the economy between 2009 and 2013 was “ineffective”. Their research also found that investment efficiency has fallen sharply in recent years, which means the economy gets steadily less additional growth for every unit of additional investment, to the effect that annual growth in the relevant period, corrected for ineffective investment, would be 2 to 3 percentage points lower than in the official statistics.

If you dig holes in the ground and fill them up again, that’s economic activity without anything being produced. If you borrow money to build highways that are never used or apartments that are never lived in, that’s not investment that creates real capital.

Building an unnecessary airport creates demand for steel, concrete, glass and the like, and jobs are created. But once the airport is there with little traffic, it becomes a drain on the economy. It has to be kept in service for little or no business, or abandoned.

During the growth period, China has had a steady flow of such ineffective investments. That has notched up the GDP numbers to artificial levels. The numbers have not always been “incorrect” but neither have they reflected real economic strength.

Part of the reason why measured growth has been falling recently is that the burden of debt and ineffective investment has been accumulating and has caught up with the real economy, and come to weigh more heavily in the balance. The new figures are lower partly because real growth is down but partly also because the previous exaggerated figures are no longer statistically maintained.

False economies are not exclusive to China, but one of the ways in which the Chinese state-investment-driven economy is different is that it has more and bigger false economies than usual. The more realistic way of reassessing the economy is to ask what real strength it has rather than just how the numbers add up. That way of approaching it unavoidably leads to a downwards adjustment.

Now that the world is coming to know Xi Jinping and his group, the West is engaged in a reassessment of the Chinese regime. That reassessment should start from the economic foundations. China has been respected, or feared, mainly because of its economic growth. But there is less strength there than meets the eye – and less reason for both respect and fear.

Stein Ringen is emeritus professor at the University of Oxford. His book on the Chinese state, The Perfect Dictatorship: China in the 21st Century, is being published by Hong Kong University Press.


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